Devising new incentives was a main element of health care reform in Israel,which created a regulated market that embodies many principles of managed competition. This study examined sick fund directors' perceptions of the new incentives and their strategic responses to these incentives, enabling the testing of how managed competition works in practice. The methodology used was a multiple case study of Israel's four sick funds. Data were gathered through in-depth interviews with 160 senior officials, analysis of national health insurance legislation, and analysis of published and unpublished archival documents, newspaper articles, public statements of senior managers, and other published data on the sick funds' behavior. The study revealed discrepancies between planned and perceived incentives and highlighted the effect of the latter on strategy formulation. Analysis of sick fund strategies showed that their responses to managed competition incentives deviated from theoretical expectations, compromising some of the objectives of the reform. The study also shows that contextual features account for the specific model of managed competition that was implemented and for the specific strategies employed by the sick funds. The study concludes by highlighting the need to build a process that will enable policy makers to consider local contextual factors when planning and implementing reform, involving health care providers in designing incentives, continuously monitoring processes and outcomes in the reformed system, and allowing for flexibility in policy making.

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